Forget Nvidia! 1 AI stock to buy that could rise 41%, according to Wall Street

This writer has been looking for an up-and-coming AI stock to buy for his portfolio. Here is the one he likes best right now.

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If I’m after a stock to buy in the realm of artificial intelligence (AI), then Nvidia might seem the go-to choice. The firm currently controls around 90% of the advanced AI chip market.

However, Nvidia is now a $2.2trn company, the third-largest in the world by market cap. It’ll be difficult for its share price to keep multiplying, in my view, simply due to the law of large numbers.

Therefore, investors like myself chasing higher potential returns might be better off considering smaller companies.

Here’s one exciting AI stock that I’ve been buying recently.

A curious oddity

The stock I’m referring to is Oddity Tech (NASDAQ: ODD). This is an AI-powered firm that sells makeup and skincare online under the fast-growing brands Il Makiage and SpoiledChild.

The share price is down 30% since going public in July 2023.

However, that hasn’t stopped Wall Street taking a shine to the stock.

Currently, 75% of analysts covering it rate it as a ‘strong buy’. Their average price target is $51, which is 41% higher than the current share price of $36.

Of course, it might never reach that target. But this does show that analysts are bullish on this unique cosmetics firm.

A profitable tech innovator!

Oddity’s business is built upon big data and machine learning (a subset of AI). Shoppers use its PowerMatch system to identify precise colour and skincare formulas through their smartphone cameras.

Il Makiage is known for its signature Woke Up Like This foundation, while SpoiledChild’s proprietary AI algorithm recommends skin and hair products tailored to each individual based on their personal profile and data.

This model has seen the tech-savvy firm amass over 50m customers and 2bn data points in just five years.

On 8 May, the company reported first-quarter revenue of $212m, a 28% year-on-year increase. That quarterly figure was almost the same as it generated in the whole of 2021.

What I like here is that unlike many high-growth tech businesses, Oddity is already profitable. It achieved a 23% adjusted EBITDA margin in the quarter and generated $79m of free cash flow, which was a record.

Long term, it is targeting more than 20% annual revenue growth and a 20% adjusted EBITDA margin.

I’m buying

Now, there are risks here. With a $2bn market cap, Oddity is still a small player in the very competitive $600bn+ global beauty industry.

It also has masses of personal user data, which could be compromised by bad actors and damage trust.

Plus, you can have all the AI tech you want, but it means nothing if the products aren’t excellent. This is where Oddity Labs comes in, though. This R&D arm deploys AI for molecular discovery to develop high-quality formulas that meet specific beauty needs.

Management said that its 12-month net revenue repeat rate is 100%. In other words, customers who spent £100 in the first year spent an additional £100 over the next 12 months.

This remarkably high repeat rate demonstrates strong customer loyalty.

Meanwhile, Oddity’s third brand, focusing on medical-grade skin treatments (acne, eczema, etc.) is being readied. This should fuel further growth.

I think Oddity is onto something very powerful here. And with the stock trading at just 20 times forecast earnings, I’m going to keep loading up.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Oddity Tech. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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